Energy Storage: Four Break Out Stocks and a Short Circuit

John Petersen

On December
16th I wrote "My favorites
for a strong 2012 include AONE, MXWL, AXPW.OB, ZBB, JCI, ENS, ACPW
and XIDE. They all merit serious attention from investors who want
exposure to the energy storage sector." Since then four of
my favorites have bottomed and turned sharply higher while the Pride
of Palo Alto endures a short circuit. The following table compares
today's closing prices with the December 16th closing prices for
those five companies.

Exide Technologies (XIDE)
has been a roller coaster over the last two years. In January 2010
its 10-day weighted moving average price was $7.23. Since then
10-day average has ranged from a high of $12.02 to a low of $2.49.
While many are puzzled by Exide's volatility or blame it on
operating results, I believe the root cause of the extreme
volatility has been the gradual liquidation of a hedge fund that
owned 31.4% of Exide's stock two years ago; sold 13.5 million shares
in 2010 and sold between 2.5 million and 10.3 million additional
shares in 2011. We won't be able to nail down an exact figure for
the fund's 2011 sales until the manager files its year-end holdings
report in mid-February, but given the volume ramp and price collapse
since mid-November, I think it's likely that the fund blew out the
balance of its holdings in the fourth quarter.

Stock markets are creatures of supply and demand and prices always
reflect the balance between existing stockholders who want to sell
and new investors who want to buy. Any time existing stockholders
want to sell more shares than new investors want to buy, price is
the first casualty. In Exide's case, a single stockholder increased
the total number of shares available to the market by almost 50%
over a two year period. The end result was a stock that trades at a
41% discount to book value. I've been upbeat about Exide's future
for the last couple years because it's completed a major
restructuring that trashed historic earnings and its peers trade at
multiples of up to two times book value. Baring a global meltdown,
it's not hard to foresee a double digit price for Exide by this time
next year.

A123 Systems (AONE)
has been a classic example of how the Gartner Group's Hype Cycle
applies to stock markets in the short term. After a successful IPO
in September 2009, A123's stock price reached its peak of inflated
expectations in January of 2010 when the 10-day weighted moving
average hit $22.15. Since then it's been a steady downhill slide
into the trough of disillusionment where the 10-day average recently
hit an all time low of $1.70.

While I'm an unrepentant critic of electric vehicle hysteria
on purely economic grounds, A123 makes a fine battery based on an
objectively safer chemistry that's important to our energy future
and can offer compelling value in several important markets. Since
April of last year I've said the market over-reacted to an important
financing transaction and A123's price decline was excessive. Since
I argued A123 was reasonably valued in the $6 range, I believe its
current price of $2.10, a 25% discount to book value, is attractive
for investors who want exposure to the lithium-ion space. It's
possible that A123 will suffer further price erosion, but for now it
looks like the price is ready to begin an impressive turn to the
upside.

Active Power (ACPW)
is a fine example of how the Gartner Group's Hype Cycle applies to
stock markets over the long term. After a successful IPO in August
2000, Active Power's stock price soared into the $70s before
beginning a ten-year slide that took the price to an all time low of
$0.25 in late 2008. By January 2010 Active Power's stock price was
starting to recover and the 10-day moving average was $1.05. In
April 2011, the 10-day moving average peaked at $2.84 before
beginning another down cycle that recently reached a minimum of
$0.66 before turning positive once again.

More than anything else, Active Power's price performance is a solid
example of the ancient market wisdom that all stocks have three values –
undervalued, fairly valued and overvalued – and they only visit fair
value briefly during transitions from one extreme to the other. It
also lends credence to my belief that as stock prices oscillate
around fair value the amplitude and duration of price swings, both
to the downside and upside, are roughly proportional. Active Power
is entering a new up cycle at a particularly opportune time because
it's on the cusp of sustained profitability, revenues are ramping
rapidly and global demand for high-end power quality and reliability
systems has never been greater.

Axion Power International (AXPW.OB)
has finally turned an important corner and begun to emerge from the
mother of all supply and demand imbalances. After completing a huge
private placement in December 2009, Axion entered 2010 with a 10-day
moving average price of $1.42 that stabilized in the $1.20 range (2X
the private placement price) by February. When a resale registration
statement for the private placement shares went effective in April
2010, the dynamic was like a fire drill in a sumo training stable as
several jumbo-sized private placement purchasers tried to flip more
shares for a quick buck than the market could absorb. The result was
a precipitous collapse into the $0.60 range that lasted through
early 2011 when the stock staged a brief rally into the $1.20 range
before sliding to an all time low of $0.28 at year-end. The last
nine months have been like Exide on steroids as two sumo champions
got into an epic shoving match and collectively accounted for about
22% of trading volume, or almost 45% of all stock sales by existing
shareholders.

I don't know whether to laugh or cry when I look at Axion's stock
price. At the time of the 2009 offering, the serially patented
PbC battery was seen as a potentially disruptive technology, but only if Axion
could successfully navigate the transition from product development to
commercial production. In June of 2010 Norfolk Southern Railway
selected the PbC for electric locomotive applications that ruined
top quality AGM batteries from Enersys (ENS)
in a matter of weeks. In September of 2010 BMW jointly presented a
technical paper with Axion at the European Lead Battery Conference
that showed why the PbC is an order of magnitude better than competing
lead-acid batteries for automotive stop-start applications. Just
before Thanksgiving this year, Axion's PowerCube came on line as the
nation's first behind the meter demand response and industrial power quality
system to provide frequency regulation services to a regional grid
interconnection. In my experience, the 2009 placement at $0.57
should have put a solid floor of $1.20 under the stock prices and
each of the subsequent accomplishments should have boosted the stock
price. Those increases would, of course, have been tempered by the
reality that Axion needs to raise more capital in the first half of
2012, but now that the supply and demand imbalances are resolving
themselves, I expect the future price trend to be very different
from the past.

Tesla Motors (TSLA)
is showing a different pattern from the four breakout stocks
discussed above. After a successful IPO in July 2010, Tesla's 10-day
moving average stock price stabilized in the $25 range and
eventually climbed to a peak of $33.59 in late November. Since the
November peak Tesla's price has fallen 23% and plunged down through
the 200-day weighted moving average, a clear sign that Tesla has
passed its peak of inflated expectations and is headed
into the trough of disillusionment.

When Tesla announced the pricing and battery options for its Model S
in November, potential buyers found themselves on the horns of a dilemma
as they were forced to come to grips with the immense
cost of range anxiety. Compared to a CAFE compliant conventional
vehicle, the Model S will save the average driver 400 gallons of gas
per year, or 4,000 gallons over the course of a decade. To
accomplish this wondrous feat, the base model for Alfred E. Newman
types who are happy with a 160 mile range comes with a 40 kWh battery
pack that costs $20,000 and represents an up-front investment of $5.00
for every gallon of lifetime fuel savings. For the more paranoid Jerry
Seinfeld types who want a 230 mile range, Tesla offers 60 kWh battery
pack that costs $30,000 and represents an up-front investment of $7.50
for every gallon of lifetime fuel savings. For the high anxiety Mel Brooks
types who want a 300 mile range, Tesla offers a whopping 85 kWh battery
pack that costs $42,500 and represents an up-front investment of $10.63
for every gallon of lifetime fuel savings. When you combine those cruel product
cost realities with the fact that Tesla's stock price is an eye-watering 9.5
times book value, the price has to fall. While Mr. Market may
prove me wrong, I believe Tesla's stock price will intersect Exide's
stock price in 2012.

Disclosure. Author is a
former director of Axion Power International (AXPW.OB)
and holds a substantial long position in its common stock.